Delayed Financing

You may have heard that buying a home in the Denver area under $300,000 is difficult; the market in that price range is highly competitive now.  You may have also heard that cash is king; cash offers trump other offers because a seller knows cash is a sure deal.  What if you happen to have enough cash to buy your new home, but don’t want to leave that amount of money tied up in your new asset?  There is a solution. It’s called Delayed Financing (See page 216 of Fannie Mae’s Single Family Selling Guide.)

Delayed Financing is a Fannie Mae exception that allows the refinance of a property purchased with cash.  The new loan will be the amount of the cash purchase plus the closing costs.  The Delayed Financing Exception can be used up until six months after the cash purchase date and then it expires.  A new loan must be closed and funded prior to the six-month expiration date.

Some of the highlights of this program are as follows:

  • The original purchase must be an arms-length transaction (meaning that it does not involve family members, etc.).
  • No mortgage financing may be used for the original purchase.  This must be proved by the original HUD-1 Settlement Statement or a recorded trustee’s deed.
  • There must be no existing lien on the new property.
  • The source of cash used for the original purchase must be documented and sourced.
  • The new loan amount can consist of the original cash purchase amount, plus closing costs and pre-paids.

Very Important:

For buyers with more than four financed properties, this is a super useful tool.  (Note that the cash-out option is not available for buyers with more than four financed properties, per Fannie Mae guidelines on conventional loans).  However, with delayed financing, a new home can be purchased with cash, and within the first six months that initial investment can be refinanced (plus the closing costs).

I cannot emphasize the importance of this tool for investors.  An investor can buy a property with cash, and refinance the initial cash purchase amount, and then do it again, and again, up to ten financed properties, for conventional loans.

Vampire REOs and Zombie Foreclosures

Home buyers and their agents have had a really hard time winning bids on houses over the last year and a half.  It’s been a feeding frenzy and I’ve often wondered where all the houses went.  Did a whole crop of new people show up on the planet? How could the ratio of houses to homebuyers be so low?  For a while, there were talks of a ‘shadow market.’*  However, as time went on, and the multiple showings and multiple offers continued, belief in the elusive shadow market was lost.  Many boldly stated a shadow market didn’t exist.  Well, if you’ve been wondering where all the houses went, I think they may have been found. An article by Evan Nemeroff discusses Vampire REOs and Zombie Foreclosures.** (I love the names.  How fitting, since Halloween is coming up soon.)

Vampire REOs*** are homes that have been foreclosed but are still occupied by the previous homeowner.  It’s estimated that 47% of bank-owned homes fall into this category.

Did banks withhold properties from the market to create competition, and that competition raised home prices, which then bolstered the housing market?  It appears that way, especially in the Denver area.

Zombie Foreclosures are homes that are “still deteriorating through the foreclosure process but have been vacated by the homeowner.”  These properties are not maintained and can potentially harm the values of their surrounding neighborhoods.  In the article by Evan Nemeroff, RealtyTrac says 20% of its database is made up of Zombie Foreclosures.

So, what would happen if the shadow market were suddenly released?  Would home values drop? Would the housing market recovery be harmed?  It certainly might. However, what if it were released slowly?  Would it create great opportunities for hungry buyers who are more than ready to get into a home?

Either way, these two markets of Vampire REOs and Zombie Foreclosures “can be bargain opportunities for proactive buyers and investors.”  Refer to the article to discover which cities hold the highest numbers of these properties.

Let me help you through the maze – to find the best bargain that meets your needs.

*The shadow market, or shadowmarket, is the inventory of investor owned single-family homes, townhouses, and condos that attract renters away from traditional apartment complexes. (Wikipedia)

** Nemeroff, Evan “Vampire REOs and Zombie Foreclosures Threatening Housing Recovery,” National Mortgage News, Oct. 3, 2013

***Real estate owned or REO is a class of property owned by a lender—typically a bank, government agency, or government loan insurer—after an unsuccessful sale at a foreclosure auction. (Wikipedia)

FHA Giveth and FHA Taketh Away

On August 15th FHA released its Back to Work program.  This new program allows borrowers who have experienced an economic event that “resulted in severe reduction in income due to a job loss or other circumstances” to obtain an FHA-insured mortgage just one year following the loss of a home via a pre-foreclosure sale, deed-in-lieu, or foreclosure with a short sale, bankruptcy, or restructured debt.  See Mortgagee Letter 2013-26 for complete details.

FHA has always had a list of extenuating circumstances that make it possible for borrowers to obtain an FHA insured mortgage just one year after foreclosure (or deed-in-lieu of foreclosure).  See HUD Handbook 4155.1 4.C.2.f – Previous Mortgage Foreclosure.  Some examples of these extenuating circumstances, which must be beyond the control of the borrower, are a serious illness such as a heart attack or the death of a wage earner. Now, FHA has added “economic event” to this list.

Highlights of the Back to Work program:

  • It applies to purchases only; does not apply to refinances.
  • The homeowner must complete a HUD-approved homeownership counseling program at least 30 days prior to a new loan application.
  • An acceptable Housing Counseling Certificate must be submitted with a new loan application.
  • Certificates are good for six months. (Note: Contact me for a list of agencies, locations, and times for this counseling program.)
  • The property lost due to foreclosure, etc. must have been a primary residence at the time of the economic event.
  • A borrower MUST be able to document the economic event.  This is very important.
  • This program became available August 15, 2013 and will end on September 30, 2016.
  • This program is only available for FHA case numbers pulled on or after August 15th, 2013.

Although the guidelines for qualification are strict, this can be a great opportunity for those who qualify.  FHA is responding and adapting to the market as it is today.  As FHA states, “FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.”

Per the HUD Handbook 4155.1 4.C.1.a, FHA recognizes that, although past credit performance is a useful guide to determining a borrower’s attitude toward credit obligations, it may not reflect the whole story.  FHA underwriters are encouraged to consider a borrower’s overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments.  It’s about assessing risk. Will the money be repaid?

On June 3, 2013, FHA rescinded its automatic cancellation of the annual MIP (also known as never-ending monthly mortgage insurance) for most of its programs.  See FHA Mortgagee Letter 2013-04.  This new mortgagee letter introduced increased mortgage insurance rates, effective for case numbers pulled on or after April 1, 2013.

Back in the old days, if you took out an FHA fifteen year fixed loan with an LTV at or below 78%, you did not pay monthly mortgage insurance.  Now, for those loan types with case numbers pulled on or after June third, there will be monthly mortgage insurance of 45 bps (basis points).  See the chart below for a comparison of both old and new guidelines for mortgage insurance premiums and durations.

Previous and New Duration of
Annual MIP by Amortization Term and LTV Ratio

Image 01Exceptions to MIP Duration Changes:
Title I, and Home Equity Conversion Mortgages (Reverse Mortgages)

Previous and New Annual MIP Rates
by Amortization Term, Base Loan Amount, and LTV Ratio
Effective for Case Numbers Pulled on or after April 1, 2013

Image 02

Previous and New Annual MIP Rates
For Loans with LTV Less Than or Equal to 78% with Terms up to 15 Years
Effective for Case Numbers Pulled on or after June 3, 2013

Exceptions to MIP Increases:
Streamline Refi’s of FHA Loans Endorsed on or before 5/31/09,
Title I, and Home Equity Conversion Mortgages (Reverse),
Hawaiian Homelands, and Indian Reservations

You might be asking why FHA did this?  Why did they create never ending monthly mortgage insurance?

Well, because they are in the red, they are hurting badly.  There have been rumblings about the financial security of the FHA Mutual Mortgage Insurance Fund for quite some time.  FHA is still reeling from its losses during the housing bubble.  At one point in 2012 there were even talks of a government bailout for this almost 80 year old entity.  Low performing loans and seniors who are technically in default due to unpaid taxes and insurance are just a couple of the issues that have led to FHA’s problems.

However, FHA has made several moves to shore up its fund.  It raised up-front mortgage insurance and annual premiums a few times, it sold non-performing notes, it ended seller-funded down payments, it introduced risk-based pricing (in the old days the interest rate on an FHA insured mortgage was unaffected by a low fico score), it modified its guidelines to make qualifying harder, and it restructured its reverse mortgage programs to limit cash out and encourage seniors to select healthier, better-performing reverse mortgage products.  FHA has seen healthier business on its books since 2009, but the improvements didn’t come in time to prevent more extreme forms of curtailment.

Therefore, in its effort to adapt rather than go extinct, FHA giveth and FHA taketh away.